April 3, 2019

The Three Recipes to Reduce the Debt {Public Debt

Public Debt: the biggest economic problem in Italy

All the world’s economists over the past decade have identified, in the ‘debt overhang publi Co., the biggest economic problem of Italy.

They all agree that if public debt continues to grow at this speed it will soon become unsustainable.

In order to better understand the situation, we report some data describing the Italian public debt :

  • 1.5% of real GDP growth – 0.8% increase in inflation = nominal growth of 2.3%
  • interest paid to financial markets of over 3% of GDP.

This simply means that Italy currently produces more public debt than income. As we know, every country from the economic point of view is similar to a “company” whose ultimate aim is to “generate profits” necessary to satisfy the needs of the entire community through services.

During the article we will try to suggest some “recipes” that could help reduce the public debt / GDP ratio .

Let’s first take a look at the public debt situation of some European countries compared to Italy.

The Italian public debt is around 2218 billion , equal to over 132% of GDP (worth around 1672 billion) and is second only to the US public debt (18237 billion dollars), to the Japanese public debt (over 10000 billion dollars) and the Chinese one (about 5000 billion dollars). The most worrying figure, however, concerns the relationship between public debt and GDP.
In this case we are preceded only by Japan with a debt / GDP ratio close to 200% and Greece close to 170%. Having a debt / GDP ratio so high clearly results in a “spi rale” economy of which is difficult to get out of it: p er pay interest on its debt has in fact forced to raise the debt itself.


But who holds this debt?


But who holds this debt?

  • 30% is held by foreign countries
  • 29% is held by banks
  • 21% is held by insurance companies
  • 15% is held by the Bank of Italy.
  • 5% is held by private investors (eg families)

This economic spiral obviously also risks reducing the importance of our policy in fundamental decisions for the life of the country. If the economy does not start growing again, every political decision is strongly influenced by the debt that grips us.

Four are the most urgent problems that the next government will have to face:

  1. The end of the European Central Bank ‘s quantitative easing which forces us to pay more interest to support our debt;
  2. Parliamentary instability;
  3. The need to sterilize about 30 billion in VAT increases;
  4. the Fiscal Compact with the increase of restrictions by the European institutions of a prompt return of public debt in European standards.  

Having said that we try to draw up three proposals that could help reduce public debt.






According to the German economist Richard Werner , to reduce Italian public debt it is necessary to borrow directly from commercial banks without issuing marketable securities.

The ” Werner recipe ” is based on some simple concepts: commercial banks , possibly public, should grant long-term loans to the Italian State with a lower interest rate than that applied to normal customers. This would give two advantages:

the first for banks that would have a safe credit to collect compared to an “infallible” investor like the State, the second for the Italian state that would have a debt not subject to financial fluctuations (as happens with the BTPs) thus managing to recover a part of the debt through the collection of dividends from the banks of which they are shareholders. It seems a simple and easy to apply solution, but incredibly ignored by national and European institutions.






The two Italian economists propose a solution that would be revolutionary and that would “overturn” the entire economic apparatus of the country in which it would be applied. The proposal is to divide the banks into two large groups, “Money Bank” and “Credit Bank”.
The former would simply collect money and offer a 100% guarantee on depositors’ deposits. In this way the risks and the management charges deriving from the deposits would be canceled.
The “Credit Banks” in contrast , would be the commercial banks in the true sense of the term. Their mission would be to “find” outside investors and fathom private individuals who require loans.
This solution, which would be difficult to achieve in the short term, would in fact lead to the elimination of banks’ ability to create money, the issue of money would remain an exclusive of the Central Bank .

In the proposal of Fratianni and Savona , therefore, commercial banks should invest capital procured by themselves by assuming the business risk that should be inherent in commercial banking. We know well that today unfortunately this does not happen.

In this way we would have the complete protection of the current accounts, the money of the account holders would not be reinvested in long-term debts and the cost of the payment system would be reduced compared to that currently practiced by the banks, becoming at the same time much simpler. The social advantages would be considerable, the banks would return to do their job by granting credits to families and businesses.
This solution, however, for reasons that we can easily imagine, is viewed with absolute distrust on the part of politics and also by the managers of the banks.




Unlike the other two “recipes”, the issue of Tax Coupons to increase GDP and thus the currency in circulation, is the only proposal that does not change the status quo of the monetary and fiscal system.
Such a “solution” as it is conceived is autonomous and immediately applicable by national states since, from the fiscal point of view, each state is sovereign and has no possibility of altering the balance of European economic policy.

The proposal is quite simple: the Italian state should massively issue, for a value of around 10 billion euros, Tax Discount Certificates (TSF) which entitle their holders to reduce payments to the public administration.
TSFs may be used after three years and will entitle the holder to request a “discount” on taxes or other obligations to the state (penalties, fines, etc.).
TFS could also be exchanged immediately on the financial market like any other BTP , this would allow fast cash entry.
The proposal also includes the free issuance of TSF vis-à-vis families and disadvantaged companies, as well as the use of the same TSF to make payments from the public administration (instead of the long waits to which creditors of the state are subject).
It has been estimated that the issuance of TSFs could create a 3% annual increase in GDP , without at the same time giving rise to inflation deficits.
In conclusion, this third option is the most viable in the short term to resolve the social and economic crisis . as mentioned. in fact, the latter does not imply impossible reforms in the European Commission and / or Italy’s exit from the Eurozone.




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